Arizona Court of Appeals Tackles Additional Insured Status in Construction Contracts
Construction Litigation Law Alert 12/08/14 By Edward A. Salanga
Construction contracts between owners, developers, general contractors, and subcontractors frequently require the down-stream contractor to defend and indemnify the owner, developer, or contractor. But often, the contracted party does not have the funds for indemnification, or is no longer in business, or simply refuses to comply with the indemnification provision. Moreover, the contracted party may not be able to rely upon its own insurance policy to pay for that defense and indemnity because of the contract liability exclusion, which excludes coverage for claims based on the insured having assumed liability to another. To get around these obstacles, the owner, developer, or contractor often requires the contracted party to name it as an additional insured. Being named as an additional insured on another’s policy enables the additional insured to access coverage.
Some insurance policies require that any additional insured be specifically listed by name on a schedule. Other policies have a “blanket additional insured endorsement” that designates any contracted party that the insured has to include as an additional insured under the policy. The blanket endorsement avoids the insured having to alter a schedule to name ABC Company or XYZ Company every time it contracts to do work. However, with a blanket endorsement, the additional insured must prove there is a written agreement requiring the contractor to name it as an additional insured. That was the issue in KB Home Tucson, Inc. v. The Charter Oak Fire Insurance Company, et al., No. 1 CA-CV 12-0681, a decision of first impression issued by the Arizona Court of Appeals on November 25, 2014.
Developer KB Home hired GRG Construction Co., Inc. (“GRG”) to work on a residential subdivision. Charter Oak issued liability policies to GRG that had a blanket additional insured endorsement, which described an insured as including “any person or organization you are required to include as an additional insured on this policy by a written contract or written agreement in effect during the policy period and executed prior to the occurrence of any loss.”
GRG and KB Home had written contracts that required GRG to comply with all of KB Home’s “rules, regulations, and requirements.” The contracts did not specifically require GRG to include KB Home as an additional insured on its liability policy. However, after signing the contracts, KB Home sent annual letters to GRG about its insurance requirements, including that KB Home must be named as an additional insured on GRG’s liability policy.
The City of Tucson and some homeowners filed claims against KB Home for allegedly deficient streets and sidewalks. KB Home tendered its defense to Charter Oak. Charter Oak disclaimed coverage on the basis that no written contract or agreement required GRG to add KB Home as an additional insured. The trial court issued summary judgment to Charter Oak in KB Home’s lawsuit requesting a declaration that coverage applied.
On appeal, the Arizona Court of Appeals reversed the summary judgment granted in favor of Charter Oak. There was sufficient evidence to support a jury finding that KB Home had a written agreement with GRG requiring GRG to designate KB Home as an additional insured because the contract required GRG to comply with KB Home’s rules and requirements, which included a requirement that GRG had to name KB Home as an additional insured. The court found it important that the blanket endorsement said written contract or agreement, which gave KB Home and GRG the leeway to have the written contract obligating GRG to comply with KB Home’s rules and requirements, and for those rules and requirements to be articulated later in letters or other documents. The court also pointed out that the blanket endorsement meant GRG did not have to get Charter Oak’s permission to add an additional insured. Instead, Charter Oak would always be making an after-the-fact assessment whether the evidence showed a written contract or agreement to provide additional insured coverage. Therefore, Charter Oak was not being deprived of any rights under the policy or having its coverage obligations expanded.
The take-away from KB Home for owners, developers, contractors, and subcontractors is to look carefully at the language in the additional insured endorsement in their own policies and the policies on which they are expecting to be an additional insured. Does the endorsement require the insured to specifically name the intended company as an additional insured on a schedule? Does the endorsement require a written contract obligating the insured to provide additional insured coverage? Or does the endorsement require a written contract or agreement to provide additional insured coverage? The specific language of the additional insured endorsement will determine whether the company the insured intends to be an additional insured actually will have additional insured status under the liability policy.